The week of November 17th should be officially designated “SME Regulatory Week” due to the number of events that occurred in our nation’s Capitol over several days. The primary draw was the SEC Government-Business Forum on Small Business Capital Formation.
In contrast to past years, each SEC Commissioner made an appearance (Aguilar phoned in from the satellite office in Atlanta) indicating the importance of the event. As with most public (and live-streamed) events, the Commissioners took a moment at the opening to share their opinion and perhaps give an indication as to their points of view. Granted these are highly politicized environments, but still it is good to hear public statements on important areas such as small business.
SEC Chair Mary Jo White kicked things off with her prepared remarks by stating; “small businesses play a crucial role in the growth of our nation’s economy and the creation of new jobs for Americans”. We could not agree more.
Hot topics at this year’s Forum included secondary markets for illiquid (or new) securities and the very important topic of defining what it means to be an Accredited Investor.
Chair White stated about secondary market’s;
“The JOBS Act sought to promote capital formation for small businesses by changing the initial public offering process for emerging growth companies and expanding the options for unregistered offerings. While these changes are designed to facilitate smaller companies’ ability to access the capital markets, investors in these offerings may face liquidity challenges, which would place their investment at risk …We must therefore consider these liquidity challenges in terms of both the impact on investors and the ability of small business issuers to access the capital markets.”
In regards to the definition of an accredited investor, Chair White stated;
“The goal of the reviews is to assess whether we are properly identifying the population of investors who should be able to purchase securities in a securities offering without the protection afforded by the registration requirements of the Securities Act.”
In years past this Forum has been an excellent catalyst for public feedback and good ideas. But as happens all too frequently recommendations end up gathering dust on a shelf somewhere. Having participated in the Accredited Investors session I can attest that much sage input was delivered. As for secondary markets, most industry followers recognize that a functioning process for investors to buy / sell unregistered securities can be good for both issuers and investors.
Now we must wait and see if the recommendations have any traction at the SEC and perhaps more importantly on Capitol Hill.
The text of Chair White’s speech is reproduced below.
Chair Mary Jo White
I want to reiterate the welcome to everyone to today’s Government-Business Forum on Small Business Capital Formation. I especially want to thank all of the panelists and participants in today’s program. You all serve as our eyes and ears in the small business community, giving us critical insight into the impact of our rules on small businesses, and we are always eager to engage in discussions with you and benefit from your recommendations. And, I also want to thank the staff of the Division of Corporation Finance and the Division of Trading and Markets for their work in organizing today’s Forum.
You don’t need me or any of us to tell you that small businesses play a crucial role in the growth of our nation’s economy and the creation of new jobs for Americans. Today’s event is the SEC’s 33rd Government-Business Forum. Each year, we gather with leaders of the small business community to learn more about the needs of entrepreneurs and small business owners and the impact that our rules are having or could better have on their efforts to raise capital and grow their business. The open and direct discussions that are a hallmark of these Forums have resulted in many thoughtful and creative recommendations for reducing regulatory impediments for businesses seeking to access the capital markets. Just as a point of reference, some of the Forum recommendations that the Commission or the staff has acted upon in the last decade include:
- simplifying the disclosure and reporting requirements for smaller companies and allowing smaller companies to provide less burdensome, scaled disclosures
- shortening the holding periods for resales of securities under the Rule 144 safe harbor from one year to six months for reporting companies
- exempting compensatory employee stock options from registration under the Exchange Act of 1934
- providing a transition period for smaller reporting companies from the say-on-pay and frequency votes required under the Dodd-Frank Act; and
- developing a pilot program to assess the impact of tick size on market liquidity for small-cap companies.
As you know from your agenda, today’s Forum will explore a number of important issues that affect small businesses.
Our first panel will address the very important subject of secondary market liquidity for securities of small businesses. The JOBS Act sought to promote capital formation for small businesses by changing the initial public offering process for emerging growth companies and expanding the options for unregistered offerings. While these changes are designed to facilitate smaller companies’ ability to access the capital markets, investors in these offerings may face liquidity challenges, which would place their investment at risk. These same challenges could also constrain the positive potential that the changes to the offering process could have for small business capital formation. We must therefore consider these liquidity challenges in terms of both the impact on investors and the ability of small business issuers to access the capital markets. We very much want your feedback and your ideas in this area.
The second panel will focus on the accredited investor definition, a very important subject for us and for you. As you know, the Commission staff, including staff from the Division of Corporation Finance and the Division of Economic and Risk Analysis, is conducting a comprehensive review of the accredited investor definition as it relates to natural persons. The goal of the reviews is to assess whether we are properly identifying the population of investors who should be able to purchase securities in a securities offering without the protection afforded by the registration requirements of the Securities Act. A critical part of the staff’s review is soliciting and considering input from the public and other interested parties, obviously and importantly including those of you here today, so we are anxious to hear your insights on this important topic.
After the morning panel discussions, as is the tradition of the Forum, we will ask you to join breakout groups to discuss and draft specific recommendations on the topics covered in the two panels. We will also ask you for recommendations on the disclosure effectiveness review that the Division of Corporation Finance is undertaking and on exempt securities offerings. And let me emphasize how very interested we are in the recommendation you make.
As we assess your recommendations, we always consider carefully the impact that the suggested changes would have on investors – both in terms of what risks they may face, but also whether the change would serve to attract investors to small business investing. Obviously, regulatory changes that compromise investor protections or raise concerns for investors about investing will ultimately cost the small business community more than any benefit derived from the proposed change. Investor confidence – confidence in small business investing and in the fairness of the capital raising process – is an important guide as you discuss, test and formulate your recommendations and as we consider them. It is really the marriage of investor protection and better ways to facilitate more capital formation that makes our markets the envy of the world. I very much look forward to the output from today.
Thank you again for your efforts today to help us to improve the ability of small businesses to access our capital markets, to grow and drive job creation and economic growth.